BHP Group: Inflation stings but pressure easing
About the author:
- Author name:
- By Adrian Prendergast
- Job title:
- Senior Analyst
- Date posted:
- 22 February 2023, 9:30 AM
- Sectors Covered:
- Mining, Energy
- BHP Group (ASX:BHP) reported a softer start to FY23 than we expected, with inflationary pressures and added inventory costs contributing to lower first half earnings.
- 1H23 missed consensus estimates by 5% at both EBITDA and EPS.
- Dividend payout ratio returned to pre-COVID norms around 70% in 1H23.
- BHP starts formal process to sell more coal assets, in Daunia and Blackwater.
- Total Samarco provision stable at US$3.3bn, with BHP agreeing to fund US$915m towards Fundacao Renova programs during CY23 (vs MorgansE US$400m).
- We maintain a HOLD rating on BHP, with an updated (login to view) Target Price.
1H23 underlying EBITDA US$13,230m (vs consensus US$13,919m / MorgansE US$13,775m), -28% year-on-year (yoy) although still at a healthy margin of 54%. Copper and coal EBITDA missed, while WAIO was in-line with estimates.
Underlying NPAT of US$6,597m (vs consensus US$6,822m / MorgansE US$7,242m), -32% yoy.
EPS of USD 128cents, was 5% below consensus. BHP flexed its payout ratio for a dividend of USD 90cents (vs consensus USD 88cents / MorgansE USD 86cents).
BHP also outlined that it had accelerated Jansen Stage 2 (potash), with the aim being to get Stage 2 development ready as quickly as possible.
Along with the result, BHP commented that it had started formal processes to divest both Daunia and met coal assets. The move is consistent with BHP’s long-stated intention to focus on high quality met coal, and to be fair there were questions about the future of Daunia and Blackwater at the time of the BMC sale.
1H23 group capex surprised at just US$3.0bn, against unchanged FY23 guidance of US$7.6bn. With BHP flagging significant H2 skew from ramping up spend on things such as Jansen Stage 1, sustaining capex and decarbonisation.
The key contributors to the 1H23 miss were BHP’s copper (-13% vs consensus) and coal (-6% vs consensus) segments. By asset, the biggest misses were from Olympic Dam (inflation and inventory drawdown), Pampa Norte (inflation and SGO ramping up) and BMA (weather impacted/inventory draw). BHP expects cost pressures to generally stabilise in 2H23, while cost decreases will likely be lagged.
An impressive 1H23 performance from WAIO (WA Iron Ore), with a H1 production rate of 264mtpa (vs FY23 guidance 249-260mt) and H1 C1 cost of US$15.50/t (vs FY23 guidance of US$18-$19/t).
BHP was asked multiple times on the result call if its FY23 guidance was too conservative on WAIO, but the miner outlined notable second half factors that would drag on shipments, such as: 1) PDP (Port Debottlenecking Project) in 2H23 – part of BHP’s path to >200mtpa, 2) the impact to operations from the tragic fatality (entire WAIO system suspended for approximately a week), and 3) wet season.
In terms of the outlook for 2H23, BHP also outlined its expectations that accelerating China growth would be enough to offset weakness across the OECD. A significant boost for investor confidence, with markets still measuring the potential implications of multiple advanced economies possibly entering recession.
While some inflationary pressures are showing signs of moderating, BHP warned that the pace of costs easing will likely lag on the way down.
Forecast and valuation update
Updated FY23 estimates for 1H23 result, adjusting 2H23 to keep within guidance ranges on unit costs and capex.
We have lifted our estimated contributions towards Samarco remediation. Revised TP of (login to view).
Post the 1H23 result we maintain our HOLD rating.
We continue to view BHP as offering exposure to China re-opening, with high quality earnings and a healthy dividend. Although at current levels it appears trading around fair value territory.
Metal demand drivers (global growth). FX risk. Execution risk on growth.
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